Congress acts to protect military families from predatory lenders

  • Published
  • By Capt. Todd Swensen
  • Base legal office
With the New Year here and Christmas bills starting to pile up, plenty of us are wondering how we will pay the credit card bills and cover the taxes due in April. 

For those of you thinking of taking out a payday loan to help with the credit card bills, think twice before entering the front doors of the closest payday loan company. 

Payday lending - sometimes called cash advance - is the practice of using a post-dated check or electronic checking account information as collateral for a short-term loan. To qualify, borrowers only need personal identification, a checking account and an income from a job or government benefits, like Social Security or disability payments. 

However, predatory payday lending costs American families $4.2 billion every year in predatory fees. 

As members of the armed forces face continuing demands in the call to protect their country, Congress recently enacted a new law that will protect military members and their families from payday lenders. This new law, called the federal Military Lending Act, took effect on Oct. 1 and limits the capabilities of payday lenders, or "predatory lenders", to gouge military families with payday loans that trap borrowers in debt that typically carry 400 percent annual interest rates. 

In a report to Congress in August 2006, the Pentagon said: "Predatory lending undermines military readiness, harms the morale of troops and their families and adds to the cost of fielding an all-volunteer fighting force." 

The new law caps interest at 36 percent for certain payday, auto title and refund anticipation loans made to military families. This annual percentage rate, referred to as the "military annual percentage rate," includes all fees and charges known at the time the loan is made. This prohibits the possibility of charging origination fees, administrative fees, membership fees and the like to avoid the 36 percent cap and continue to charge high rates for these short-term loans. 

In fact, under the new law, the lender is responsible for informing the borrower of the "military annual percentage rate" in writing and orally. Additionally, the law says payday lenders cannot hold onto the service member's personal check or have electronic access to their bank account as collateral for these short-term loans. 

So, as you open those credit card statements in the following weeks and realize Christmas cost more than you can afford, think long and hard before entering a payday loan store. Although payday loans may sound like a good source of quick and easy cash, the truth is, these types of loans may push you further into debt. 

If you simply cannot avoid taking out a payday loan, protect yourself by knowing your rights under the new law and by borrowing only as much as you can afford to pay back. Payday loan roll-overs can lead to a vicious cycle of unending debt that can last way beyond your next paycheck.